By: Dividend Sensei
Long time readers know that I’m firmly a long-term investor and not someone who attempts to time the market. That’s because I’m a student of history and know that the track record of almost everyone that jumps in and out of stocks is abysmal (just 1% of day traders consistently make money over the long-term). That being said I recently came across a little known market trend that has potentially very exciting implications for long-term buy and hold investors such as myself. A trend that if it holds true could soon mean that investors will be raking in massive profits.
Midterm Election Years Are Historically Great Times To Be In The Market
Thanks to the computer age it’s easy to data mine historical market returns and find correlations that can easily prove fruitless (correlation doesn’t equal causation). However there is a trend that thus far has proven very robust and profitable for many investors over the decades.
Specifically the fact that the 12 month period around midterm elections is one of the best ones for stocks. According to Chief Equity Strategist Sam Stovall of S&P Capital IQ, the period of October 31st of an election year, through October 31st of the following year (2019 in this case) has been a time of impressive and very consistent returns. Since 1946 there have been 17 midterm elections. Now anything under 40 is considered by statisticians to be an insufficient data set to make any significant conclusions. But consider the fact that 100% of those time periods (17/17) have seen positive market returns, ranging from 3.2% (in 1987 despite the 20% one day market crash), to 33.6% (in 1954). The average return over this 12 month period is an impressive 17.5%. Breaking it down further Ken Fischer of USA Today has calculated that 87% of the time Q4 to Q1 following a midterm year has seen a positive return, on average 14%. Even more exciting? The third year of a president’s term (2019 for us) has always yielded a positive return, at least since 1945. And since 1871 just 2 third year annual market returns have been negative.
There is a chance that this is pure numerology, the equivalent of anticipating market returns based on totally unrelated events such as sunspot frequency. However some have postulated that the reason for this pattern is because the market hates uncertainty and the two quarters before a midterm are usually full of uncertainty surrounding potential shifts in Congressional power (which might have policy effects for the economy, corporate profits, and stocks). Once a midterm is over the uncertainty abates and the market breathes a sigh of relief, allowing stocks to resume their historical trend higher (stocks rise 76% of the time in any given year). This hypothesis seems plausible if only because historically the president’s party tends to lose seats during a midterm. That often leads to a divided government (Presidency and Congress controlled by different parties). That in turn usually leads to gridlock and while citizens may find a do-nothing Federal government frustrating stocks love it because it means no major policy shifts that might affect corporate profits.
Ok so we have an exciting and highly consistent period of great stock returns that might indicate boom times ahead for investors starting October 31st 2018 (and lasting through the end of 2019). However long-term investors must always be skeptical of statistics for their own sake and consider the fundamentals. Or to put another way is there any reason to think that stocks might indeed go up about 17.5% over a 12 month period starting on Halloween of this year? The good news is there is indeed reason for such optimism.